Friday, November 23, 2012

September 2012 Employment Report

Unemployment took a hit in September, as the end of Ramadhan meant more people looking for work, but not quite enough jobs to go around (‘000):

The unadjusted employment numbers were slightly negative, though not by much. However, the economy registered more people entering the labour market(‘000):

…ultimately resulting in higher unemployment:

I don’t want to read too much into this – it’s obvious that seasonal adjustment of the figures doesn’t quite smooth out all of the seasonal variation, and the confluence of a sharp drop and recovery across both unadjusted and adjusted numbers is very suggestive.

So the jump in the unemployment rate from 2.7% t0 3.2% isn’t as drastic as it appears at first glance. As long as the ratios are within the historical norms, I’m not going to be too concerned.

1. Not to my knowledge, though I believe that there are stats on the actual numbers. That's a bit different from calculating a rate however.

2. Two potential explanations here. One is structural unemployment - those looking for work do not have the qualifications or skills required for the jobs on offer. The second is frictional unemployment, which is people who are employable, but are between jobs or are geographically in the wrong place (i.e. the jobs are located somewhere else).

Both these concepts are related to the notion of a "natural" rate of unemployment, which would exist irrespective of economic conditions. In that case, there would be no inconsistency between high demand for labour (of whatever sort) and the existence of unemployment.

In fact, there's more than enough current vacancies (ranging from low skilled to high skilled) to supply jobs for all the unemployed and then some - the current ratio's about 1.4 vacancies for unemployed person. Shortage of high skill labour in Malaysia is every bit as acute as it is for low skill labour:

Are you saying that productivity improvements are not possible in the services sector?

That's difficult to accept. How can workers in the services sector expect higher wages/and better benefits if there's no improvement in productivity? That's a sure formula for driving companies' bottom lines lower.

And in the manufacturing sector, which still accounts for a substantial chunk of Malaysia's GDO and export earnings, the need to move to a high skill high wages environment is self-evident.

That's why I am concerned about the "Maquiladora effect" of Singapore-based SMEs moving their labour-intensive operations to Iskandar Malaysia (to benefit from cheaper land, labour, utilities and a plethora of government incentives), while retaining the high value-add functions (which provide better-paid jobs) in Singapore.

How does Malaysia benefit from this, apart from bumping up the employment figures?

No, that's not what I meant. What I meant is that its near impossible to determine what productivity means in the services sector.

The biggest problem here is that since services output is intangible, productivity in services is simply a factor of price divided by the cost of factor inputs. Higher labour productivity then is simply higher services prices for a given amount of labour. It follows then that for a given level of equilibrium "output", higher prices => higher profits => higher wages. In this sense, nominal = real.

The services sector BTW, is a little over double the size of the manufacturing sector in Malaysia.

Completely off topic - I've been itching to ask where the Bloodstone moniker came from? Is that a reference to Karl Wagner's Kane?

This was an interesting enough question that I had to research it. My best judgement would be that any such shift would be limited.

Broadly, value added in Malaysia and Singapore manufacturing are pretty similar, even looking at the breakdowns by category. The biggest differences are in chemicals, machinery and transport where Singapore has significantly higher value added, but which also comprise the bulk of Singapore's industrial output.

There are also strategic and complementary reasons for some of these activities to remain in Singapore (e.g. shipbuilding, oil refining).

...and then there's the tax differences.

The implication is that there's limited scope for shifting low value-added activities from Singapore to Johore. The employment implications aren't very large either - total manufacturing employment in Singapore is just over 400k.

I am not entirely convinced by your reply, but I have to research it some more.

Suffice it to say that I am still concerned about the direction Iskandar Malaysia is taking. Anecdotal evidence, supported by reports in the Singapore newspapers, suggest that Singapore-based SMEs are relocating their labour-intensive operations to Iskandar (or Batam)as land prices in Singapore continue to rise and as the Singapore government clamps down on unskilled and semi-skilled foreign labour.

I doubt that these foreign SMES are bringing any significant technology or high-end manufacturing to Iskandar Malaysia.

Also, the finished products from their operations in Iskandar (and in the other industrial zones in the greater Johor Bahru region) are sent back to Singapore (which retains the SMEs' Hqs, sales and marketing and R&D functions) for final assembly and re-export.

So, where is the "win" for Iskandar Malaysia in these types of manufacturing investments?

As far as high value added activities remaining in Singapore, that's hardly the sole province of SMEs, nor is Malaysia the only one to suffer from the phenomenon. Singapore houses HQs for many MNCs although their actual operations might be in Thailand, Indonesia or Malaysia (value added BTW, is more or less just EBITDA)

Nor am I singling out Singapore here either - revenue offshoring for tax purposes is pretty common in Western countries too, though they're more likely to use the British Virgin Islands, the Caymans, or Luxembourg for this purpose (e.g. Apple and Microsoft, to name two recent examples that have been publicised).

I'm sitting at MIER's National Economic Outlook Conference, and there's some interesting data being presented by the World Bank:

1. Almost all the jobs created in Malaysia in the past decade have either been high skilled or mid-skilled jobs. Low skilled job creation has been very low. On the other hand, Malaysia is still perceived as a low wage investment destination.

This is going into the realms of the risible and does little to contribute to the real question of how to increase productivity to justify higher wages in all sectors of the economy.

Btw, I draw your attention to comments made by Singapore DPM and Finance Minister at the recent WIEF meeting in Johor Bahru.

According to a report in the Singapore Straits Times on 5 Dec 2012, Mr Tharman said that a '"nice complementary space" is developing between Singapore and Johor for businesses, as more companies in Singapore look to the Iskandar Malaysia development corridor as a place to base their operations.'

Mr Tharman said, according to the report: "There'll over time also be increasing pressures on our small and medium-sized businesses, because of the shortage of labour in Singapore as well as of land...Malaysia is a logical hop away, easy in terms of operational flexibility and logistics."

Mr Tharman also said: "The job of the (Singapore) Government is to ensure that with limited land, limited labour, limitation of resources generally, you have a level playing field and you have fair pricing.

"Some businesses, based on their business models, will find it very worthwhile to grow in Singapore...but (others may) rather make use of opportunities in Malaysia and elsewhere, where you have labour available at a lower salary and more availability of land. That's how Singapore itself grew."

Funny, but I think that Mr Tharman's comments support remarks I made earlier in this thread about Singapore SMES relocating their labour- and land-intensive operations to Iskandar Malaysia, and what in my opinion, could be the consequences therefrom.

Ordinarily, I'd agree with you regarding the classification, except that the data shows that the number of high-skilled jobs created exceeds that of middle and low skilled labour combined. (BTW, speaking of categorisations, the ADB's classification of "middle class" is basically anybody out of poverty!).

Second, the link between productivity and wages is increasingly tenuous globally. For example, since 1998 Malaysian manufacturing productivity per worker has increased 40% more than wages per worker. Raising productivity will raise GDP, but not necessarily worker compensation or household incomes. In fact, Singapore is a bit of a special case - they have apparently achieved all their income gains over the decades with little to no increase in productivity at all.

Third, with respect to Singapore SMEs, I still question the scope of any such shift. Moreover, after reading more on the subject, Singapore SMEs apparently face labour constraints across the whole job spectrum and not just at the lower skilled end, because of competition for labour with larger firms and MNCs. Any such shift would involve employment across all skill sets and activities, not just the low value added ones. Not that I think they would have much better luck here - we've got as big a shortage of high skilled labour as they do.

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About Me

An applied and practicing economist in the Malaysian financial sector.

The purpose of this blog was first to have a way to put down and present my ideas, work in progress, and thoughts on the Malaysian economy. The second reason was to hopefully attract critiques and feedback, that would help me improve on my own understanding of the way the world works, or at least, this little corner of it.